German Chancellor Angela Merkel and French President Nicolas Sarkozy. Photograph: Michael Probst/AP

Angela Merkel and Nicolas Sarkozy have claimed numerous times over the past 18 months to have struck a ground-breaking deal to snatch the eurozone from the jaws of disaster. But when they meet in Paris on Monday – and join their fellow European leaders in Brussels on Thursday and Friday – the stakes will be higher than ever, including those for their neighbours across the Channel.

Chancellor George Osborne and Sir Mervyn King, the Bank of England's governor, have made it crystal clear that the health of the economy, and the future of the banking system, critically depend on what happens in the eurozone.

By the end of this week, the outline of a plan appeared to be emerging. ECB boss Mario Draghi dropped a hint to the European parliament that if a new, more binding "fiscal compact" could be struck, "other measures" could come into play.

Euro-watchers heard his remarks as a promise of massive intervention by the Frankfurt-based central bank – so long as the eurozone's governments promise to subject their future tax and spending plans to strict oversight from Brussels, with penalties for transgression.

At the same time, Draghi has been constructing an intellectual justification for more drastic ECB intervention in the Italian and Spanish bond markets. He has stressed that the bank's inflation mandate forces it to tackle deflation – falling prices – just as aggressively as inflation.

If, as expected, a sharp downturn takes hold of the eurozone over the next few months, inflation could slip well below the ECB's 2% target. Draghi could send a strong signal that he's not going to stand by and watch that happen, by delivering a second cut in interest rates when the ECB meets this Thursday.

Both Italy and Greece, which now both have unelected "technocratic" governments, are due to announce new, yet more ferocious budget measures this week, helping to underline the fact that the profligate Club Med countries have been brought to heel. That will provide Draghi with more ammunition to argue that the ECB is now free to intervene without appearing to be underwriting the free-spending policies of the south.

Meanwhile, creating what Merkel described in a speech on Friday morning as a "fiscal union," with close monitoring of member countries' budgets, should allow her to justify more aggressive intervention by the ECB to the sceptical German public.

There are still many unanswered questions about the plan that is emerging, not least whether any significant treaty changes would be agreed by national parliaments in the eurozone rapidly enough to halt what is becoming a slow-motion bank run in Greece and Italy.

Greek banks lost €14bn in deposits in the two months to the end of October, as foreign investors withdrew their funds, and fearful Greeks cleared their bank accounts and stashed the cash under the mattress – or overseas. In total, deposits in Greek banks are down by as much as a quarter, since peaking in 2007.

"It's a bank run, that's what we're talking about," says Erik Britton, of Fathom Consulting, which has estimated that a euro collapse could be half as bad again as the bankruptcy of Lehman Brothers for the UK economy. "For now, the centre is holding; but as soon as a bank run starts, the game's over".

And as King made clear last Thursday, when he delivered the verdict of the Bank of England's financial policy committee on the risks facing the financial system, the UK would be highly vulnerable if the euro were to be threatened. The governor warned that we face an "exceptionally threatening environment".

His comments came after the Bank joined five of its counterparts across the industrialised countries, including the US Federal Reserve and Bank of Japan, to pump liquidity into financial markets by reducing the interest rate on emergency loans of dollars to cash-strapped banks.

As the surprise announcement was made, giving a boost to share prices on both sides of the Atlantic, rumours swirled on trading floors in the City that a French bank had come close to collapse.

Part of the motivation of "Merkozy", as the markets call them, in trying to calm the crisis and answer once and for all the question of whether the eurozone is solvent, is to underpin their own banking sectors – and in turn, prevent the strains evident in the financial markets from rippling out to ordinary borrowers.

It's this underlying question of who will pay that has undermined confidence in the bonds of eurozone countries; and the banks that own those bonds.

"European banks have a huge exposure to sovereign bonds, for example, they own about €0.5tn of Italian government debt," says Dhaval Joshi, of consultancy BCA Research. "With the painful uncertainty on the end-value of those bonds, it is impossible to realistically measure a bank's solvency. No amount of cheap dollar liquidity can change that. Hence, not only are European banks understandably unwilling to lend to each other, they are also starting to unleash a huge credit crunch on firms and households around the world."

The careful choreography of nextweek is meant to quell these doubts about solvency once and for all, by sending a message to the world that eurozone leaders and the ECB, have finally settled their differences, and wrestled the situation under control.

As well as oversight of each other's budgets, they are likely to propose turning to the International Monetary Fund to boost the European Financial Stability Facility. The eurozone bailout fund is much too small to rescue an economy the size of Italy or Spain, and increasing its resources was at the heart of the last "comprehensive strategy" for the eurozone, in October. But hopes that developing countries, including China, would buy into the facility, came to nothing at last month's G20 summit in Cannes.

Merkel and Sarkozy hope that using the IMF to channel rescue money, they can persuade the Chinese and other developing countries that they're not throwing good money after bad.

Politicians in emerging economies are understandably anxious about the impact of the crisis on one of their major markets; but still prone to a little schadenfreude, as Brazilian finance minister Guido Mantega made clear on Friday, when he said: "It's a big satisfaction for us that this time around the IMF comes to Brazil not to give us money like in the past but asking us to lend money to developed nations."

So all the pieces seem to be in place this week for a carefully choreographed pre-Christmas pantomime, in which Merkozy rides to the rescue.

But even if all the actors play their parts, time is not on their side. As Jonathan Loynes, of Capital Economics puts it "given the difficulties policymakers have had agreeing on and implementing far less extensive policy measures, it seems very unlikely that major steps towards fiscal union can be taken in time to prevent the crisis from escalating and the euro from breaking up."

Merkel insisted on Friday that "we're almost there", but with bank funding markets all but frozen, and Europe's economies facing the prospect of recession, it's a race against time. As Britton puts it: "You can see the strains out there: we're right on the cusp of something really bad."